Germany's two heavyweight members on the European Central Bank have fought an
unprecedented duel at the country’s top court, taking opposing sides in a
landmark case that could make or break the euro.

Jens Weidmann, the Bundesbank’s hard-line chief, testified that the ECB’s bond rescue plan for Spain and Italy risks “significant losses” for Germany’s central bank and grave damage to its credibility. “Ultimately, it is the German taxpayer who carries the risk,” he said.

Mr Weidmann said the bond scheme, known as Outright Monetary Transactions (OMT), blurs the line between fiscal and monetary policy and encroaches on the terrain of parliaments. It leaves the ECB with the task of carrying out rescue operations that is the proper responsibility of the euro bail-out fund and compromises the bank’s independence.

The two-day hearings at the constitutional court in Karlsruhe will investigate the legality of the OMT, the “game-changer” that defused the EMU debt crisis last July and has been so successful that no country has yet needed to use it. The case stems from complaints by 37,000 citizens, including the Left Party, More Democracy and eurosceptic professors, most arguing that the ECB is financing bankrupt states.

While the court has no jurisdiction over the ECB, it could prohibit the Bundesbank from taking part in bond purchases. This amounts to the same thing, since the OMT would collapse if Germany stepped aside.

Chief Justice Andreas Vosskuhle said the court would adhere strictly to the law, regardless of whether ECB actions have been successful, “otherwise the end would justify the means – such an idea would go against the central tenets of a democratic state grounded in constitutional law".

The court has emerged as the arch-defender of national sovereignty in the EU system, vowing to strike down EU laws that breach Germany’s Grundgesetz and issuing a string of rulings that have constrained Berlin’s ability to take part in EMU bail-outs.

The task of defending the ECB fell to Jorg Asmussen, Germany’s member on the executive board, and a former university friend of Mr Weidmann.

He said the ECB’s actions were “necessary, effective, and within the mandate” and denied that the OMT is tantamount to monetary financing of deficits. Recounting the dramatic events of mid-2012, he said fears of EMU break-up had caused Spain and Italian borrowing to spiral to levels that reflected currency risk. Action was needed to safeguard monetary union.

“Britain’s financial authorities were advising financial institutions to be prepared in the event of the euro area collapsing,” he said. “Monetary policy was not functioning fully, or was in part not functioning at all. This economic environment clearly pointed to a significant credit crunch and a severe decline in economic activity. There was a risk of an incipient deflationary spiral.”

Mr Asmussen said the OMT must be “unlimited” to overpower the markets: “Only a currency whose existence is not in doubt can be a stable currency.”

This goes to the heart of the dispute since the court flagged concerns last September about soaring liabilities that “entail consequences hard to calculate”. Mr Asmussen admitted the ECB will not be exempt from future losses if other EMU states need debt restructuring.

The court may defer any decision until after Germany’s elections in September. It hinted at its view in a preliminary ruling last year. Bond purchases by the ECB aimed at “financing budgets independently of the capital markets would circumvent the ban on monetary financing”, it said.